KORN FERRY (US),CALIFORNIA vs. ACIT, CIRCLE 2(1)(2), INTERNATIONAL TAXATION, NEW DELHI

That the AO/DRP also failed to appreciate that these services were recurring in nature which clearly establishes that there was no element of "make-available" and it was repeat business for the Appellant. Re: Reimbursements on account of General Management Charges being taxes as FIS 11. That the AD/ DRP erred in taxing payments of INR 55,29,572, received as General Management Charges as FIS under Article 12 of the India-USA DTAA as well as section 9(1)(vi) of the Act, whilst completely ignoring that these payments were in the nature of pure reimbursement and did not involve any element of income 12. That on the facts and circumstances of the case and in law, the AO/DRP have grossly erred in not appreciating that the predominant character of the transaction was reimbursement of Korn Ferry (US) the license fees paid by the Appellant to the seller/s (such as Cyberreason Antivirus, LinkedIn, Microsoft) on behalf Futurestep Recruitment Services Private Limited and Hay Consultants India Private Limited (both of which are group companies) and therefore, payment received in lieu of subscription charges would not constitute "FIS" under Article 12 of the India- US DTAA or section 9(1)(vii) of the Act, in the hands of the Appellant, as it was merely a pass-through entity.

The assessee company is incorporated under the laws of USA and is engaged in the business of providing consultancy and professional services. During the year, the assessee received an amount of Rs.5.16 Cr. as product license fee which has been offered to tax as royalty. The amount received as Consultancy fee of Rs.5.59 Cr., Referral fee of Rs.1.68 Cr. and General Management charges of Rs.55.29 lacs have been claimed as non-taxable under India-USA DTAA under the definition of FIS.

The Assessing Officer held that on perusal of the submission of the assessee and sample invoices provided with submission it has been observed that during the year the assessee has provided consulting services to its customers for various field like consultancy services for outlining effective talent mapping strategy and assistance in outlining organisational structure to help convert clients’ plan into action, for carrying talent assessment, by comparing the clients’ needs with the talent they have and talent they need, and outline strategy to help close the gap between the two, consulting services for attracting and retention of right people across all functions for leadership and professional development. The AO held that consulting services were provided to help organizations evaluate their reward such as compensation, ESOPs, etc. and payment structure from talent retention and point. Further, all the invoices were raised for professional fee and administrative fee to its clients which are related to various assignment such as Leadership, assessments, Webinar, ESOP review, Emotional Intelligence and other training programmes.

The AO held that the submission of the assessee revolves around to stress the fact that the services provided by the assessee doesn’t make available to the group company in India and therefore the same is not taxable in India keeping in mind non-satisfaction condition of make available clause. The AO held that as per the submission of the assessee, it is clear that the Korn Ferry (US) assessee disseminate its experience, know-how and expertise in various field such as strategy for talent mapping, talent assessment, leadership and professional development etc. It was held that through strategy for talent mapping the assessee helps the clients organization’s workforce capable for delivering its future strategy in the terms of the skills, behaviors and mindsets for the talent at present, and the talent need to deliver for future strategy. Further, the AO held that the assessee helps its clients by consulting them to hire the right people and advise them on how to reward and motivate their workforce while developing professionals and through, consultancy services assessee helps its clients for overall comprehensive development, effective strategies that improve their organizational structures, create attractive rewards and benefits packages, build thoughtful assessment and succession programs and develop current talent and future leadership.

The AO concluded by holding that the services enable the clients to perform better in the area of work for development of business in which the assessee had adequate expertise. The AO held that the training has been provided by people who are highly qualified and the services were customized to suit the needs of the people. The AO held that the services provided by the assessee made the clients capable enough to solve the problems on their own.

The AO relied on the judgment of the Co-ordinate Bench of ITAT in the case of H.J. Heinz Company, USA in and Mersen India Pvt. Ltd. (20 taxmann.com 475 AAR).

Aggrieved, the assessee filed appeal before the Tribunal.

During the hearing, the ld. AR relied on the submissions made before the authorities below and the ld. DR supported the orders of the ld. DRP.

Heard the arguments of both the parties and perused the material available on record.

From the above, it can be said that mere rendering of services is not roped into FIS unless the person utilizing the services is able to make use of the technical knowledge, etc., by himself in his business or for his own benefit and without recourse to the performer of the services in future. The technical knowledge, experience, skill, etc. must remain with the person utilizing the services even after the rendering of the services has come to an end. Thus, the consideration for technical services can be taxed as FIS under the India- USA DTAA) only when the person acquiring the service is able to apply the technology on its own i.e. the recipient acquires a Korn Ferry (US) means to an end. This means that the recipient in this situation is able to reproduce and make use of the technical knowledge, etc. by itself in the business or for their own benefit and without recourse to the performer of the services, in future. "Make available" is akin to the concept of transfer and involves the transfer of technical knowledge, experience, skill, know- how, or processes to the recipient by the service provider so that the recipient can apply the same on his own. Further, merely because the rendering of consulting service requires any expertise by the person providing the service would not per se mean that technology has been made available to the service recipient.

In the instant case, the assessee has received payment for rendition of consultancy service in the field of organizational strategy, talent, reward and benefits etc. While rendering of such services, the assessee does not transmit any knowledge, skill or technical know-how in a manner that clients/customers are able to perform the aforesaid functions in future on its own without recourse to the service providers and hence, the element of "make available" in absent in such services. The same is clearly evident from the fact that such services are rendered on continuous basis from preceding years. In the present case, assessee is merely providing consulting services such as organizational strategy, talent strategy, consulting in relation to rewards and benefits and related leadership and development consulting services for which clients / service recipients need to come back to assessee, as and when they Korn Ferry (US) have such requirement and service recipients do not get equipped in providing such services.

We find that the assessee has provided services to Deloitte, Flipkart and gone through the work order and the scope of service, details of project team and cost of services. On going through the entire details, we find no technical knowledge has been made available to the client. Similarly, the review of ESOPs is a continuous process taking into consideration various parameters. Even in that, it cannot be said that the assessee “Korn Ferry” has made the clients enriched by imparting or passing permanently any technical inputs. From the terms of agreements and also from the conduct of the party, it cannot be said that the “make available” requirement has been satisfied. Hence, we hold that the services rendered were not in nature of FIS under Article 12(4)(b) of the India-USA DTAA. Reimbursements on account of General Management Charges: 18. During the year, the assessee has received Rs.55,29,572/- on account of reimbursement/general management charges. The assessee submitted before the AO that reimbursement/general management charges were received by it from Futurestep Recruitment Services Pvt. Ltd. and Hay Consultants India Private Limited which are wholly-owned subsidiaries of the assessee and assessee acts as a centralized procurement center for its affiliates and obtains subscription services such as Cyberreason Antivirus, Linkedln, Microsoft, etc. The assessee procures these services from third parties and allocates the Korn Ferry (US) relevant cost to affiliates benefitting from such services, thereby achieving operational and cost efficiencies i.e., affiliates would incur higher costs and require additional resources if they were to procure such services independent of the assessee.

Further, the assessee submitted that the amount of Rs.55,29,572/- received by the assessee pertains to reimbursement of expenses incurred by the assessee on procurement of software subscription services. The assessee has submitted copy of Master Services Agreement entered between mResource LLC and Korn/Ferry International Futurestep. The agreement reveals that mResource LLC is hosting and operating a mobile and online services in its capacity as a Global Provider of Mobile Services on software as a Service (SaaS) basis. The assessee has taken access of these services through mResource LLC by making monthly and associated fees as per the terms of agreement. mResource LLC appoints the assessee as distributor of the platform to client companies. As per the term, for the sole purpose of enabling partner to utilization the platform for its own use or on behalf of clients.

The AO reproduced the relevant part of the agreement which is as under: “C. License to Partner 1. Distribution. Loop appoints Partner to be a non-exclusive distributor of the Platform to client companies described in Addendum I during the Term, for the sole purpose of enabling partner to utilize the platform for Korn Ferry (US) its own use, or on behalf of clients or promote the platform with the relevant clients under the Agreement.

Distribution Agreement- For the avoidance of doubt, partners agrees to be bound by Loop as to recommended pricing for license and fees payable by clients in consideration for services provided to them arising out of the rights granted to Partner pursuant to clause C. 1 Loop agrees that partner may elect to procure the services on the following basis: a. Direct Licensing contract with the Partner, for the partners own use, in compliance with Schedule B, Services and fees. In which case the partner may benefit from the discounted terms in Schedule B. b. Direct Licensing contract with the partner, for use on behalf of clients, in compliance with schedule B; services and fees, or a SOW prepared for a specific client. In which case the partner may add mark-up or margin in accordance with the terms in schedule B to monetize the platform. C. As a promoter or distributor facilitating sale of the platform to clients, in compliance with schedule B, Services and fees, or a SOW prepared for a specific client. In which case the partner may be entitled to an Agency commission of 15% calculated on the total value of the applicable client contract, and paid in the form of a separate rebate quarterly in arrears, or as required by the partner in the applicable SOW.”

The AO held that on perusal of the terms of the agreement, it is clear that the assessee company is providing services to its clients after obtaining the license from service providers and installed the same in its infrastructure i.e. by making centralized platform for further licensing. The assessee has charged costs only towards usages of the infrastructure and not the cost of any identified software. Further, these services were provided by the assessee on cost mark up basis as allowed in the contract quoted above. Therefore, the AO held that it is Korn Ferry (US) not a case of reimbursement of expenses as was made out by the assessee due to the reason that when once a mark-up is added, the nature of the receipt goes outside the ambit of reimbursement. The AO held that the services provided by the assessee to its clients are ancillary services of technical/consultancy services which were provided by it during the year which are intrinsically linked with the core services that the assessee provides for. Holding thus, the AO treated these receipts also comes under the technical services and liable to be taxed as FTS income under the provisions of the Act as well as DTAA.

The AO placed reliance on the judgment in the case of Rieter Machine Works Limited Vs. ACIT (International Taxation), Circle-2, Pune (134 taxmann.com 326) wherein it was held that the costs recovered by assessee, a non-resident for third party software which was integrated into assessee’s information technology infrastructure used for rendering services to an Indian company, would be taxable as ‘Fees for Technical Services’/’royalty' as per relevant DTAA.

Aggrieved, the assessee filed appeal before the Tribunal.

Before us, it was submitted that the assessee received Rs.28,76,000/- from Futurestep Recruitment Services Pvt. Ltd. and Rs.26,52,000/- from Hay Consultant India Pvt. Ltd. which are the only one subsidiary of the assessee. WE find that the assessee procures services from third parties and relevant costs was passed on to by the assessee to the affiliates benefiting from such services. The assessee paid to the sellers and in turn got the money reimbursed from their associates. Hence, the Korn Ferry (US) same cannot be taxed. Even otherwise also, it would not partake the character of fee for inclusive services (FIS) as no knowledge or know-how was made available to the associates. The appeal of the assessee on this ground is allowed.

Since, the appeal of the assessee is allowed, the Stay Application filed by the assessee is dismissed as infructuous.

In the result, the appeal of the assessee is allowed and the Stay Application of the assessee is dismissed. Order Pronounced in the Open Court on 29/07/2024.